TORONTO, June 19 (Reuters) - Canada's banking regulator on Friday lowered the capital requirement for the country's biggest banks for the first time in three years, a move that will allow them to lend more as the government seeks to boost investment in AI, resources and other areas during trade and geopolitical uncertainties.
The Office of the Superintendent of Financial Institutions (OSFI), which oversees the banks to ensure financial stability, lowered the domestic stability buffer (DSB) to 3% from 3.5%.
The changes to the DSB, the additional capital the country's big six banks must set aside to absorb losses during financial stress, are applicable to Royal Bank of Canada (RY.TO), TD Bank (TD.TO), BMO (BMO.TO), Bank of Nova Scotia (BNS.TO), CIBC (CM.TO), opens new tab and National Bank of Canada (NA.TO), opens new tab and are effective immediately, OSFI said.
The decision to lower the DSB after three years is supported by the banks' "extraordinary loss-absorption capacity" for a range of risks, OSFI said, and will unleash hundreds of billions of Canadian dollars for lending. Banks could deploy capital more aggressively and help boost the Canadian economy during a time of global uncertainty related to trade negotiations with the United States, restructuring of supply chains, and Middle East geopolitics.
"The opportunities are there for the banks and we're getting out of the way," Peter Routledge, the regulator's superintendent, said in an interview.
"What we've done is provide clarity and certainty around capital. And it's up to the banks to figure out how to deploy it.... certainly one avenue is supporting the Canadian economy's adjustment to this new environment," Routledge said.
The regulator also noted that despite the challenges, unemployment, consumer delinquencies and credit losses have stabilized in recent periods.
In the latest quarter, the big banks all surpassed profit expectations, helped by strong earnings at their domestic businesses and capital market segments. The earnings were helped by the banks' diversified model and underwriting practices, which have helped slow loan impairments and credit losses.
Canada's top six banks, which control roughly 90% of the market, are among the most resilient financial institutions in the world, having weathered financial crises and other episodes that took a toll on banks in other regions.
However, executives at the six banks said the near-term outlook for Canada hinges on trade talks with the U.S. and how long the Middle East conflict persists, which will have an impact on client demand, supply chain stability, and the direction of monetary policy.
Reporting by Nivedita Balu in Toronto; Editing by Caroline Stauffer, Kirsten Donovan
